Charging Order: Exclusive RemedyA Charging Order is an order issued by a Judge at the request of a judgment creditor, in an attempt to collect on a personal judgment.
The charging order works like a "garnishment" against distributions made from the LLC to you personally. These distributions are "personal income" to you and are subject to this charging order. In other words, any distributions due to you would be ordered to be sent to the creditor instead, until the judgment is paid in full. If the LLC does not make any distributions (and you control this), the creditor will not receive any payments. The LLC simply retains all of its funds and continues to invest and reinvest its cash without making any distributions.
A charging order does NOT give the creditor the right to become a member in the LLC and does NOT give him any right to interfere in the management or control of LLC. Becoming a member requires the unanimous consent of the existing membership AND the Management (If your Operating Agreement is drafted properly). The creditor only receives the right to any actual distributions paid to the member.
In Nevada and Wyoming Per
NRS 86.401 or W.S. 17-29-503 the creditor cannot seize the member's membership interest or the LLC property, since the LLC property does not legally belong to any individual member. If the LLC does not make any distributions, the judgment creditor will not receive any payments. The LLC simply retains all of its funds and continues to invest and reinvest its cash without making any distributions. Property transferred to the LLC is thus safe from a member's future creditors.
In other states creditors have become creative and tried actions such as foreclosure, in an attempt to control the management of the LLC and seize LLC assets. Nevada and Wyoming laws eliminate any "creditor creativity". Nevada annd Wyoming have the toughest laws in the country with regard to creditors. In Nevada and Wyoming , per
NRS 86.401 or W.S. 17-29-503 a charging order against a membership interest in an LLC is the EXCLUSIVE remedy by which a judgment creditor of a member may satisfy a judgment.
Recent developments in case law have given Nevada Judges the opportunity to confirm the intention of the legislators when they passed the toughest laws in the country with regard to creditors:
In
Paladin Commerce Center, LLC, Debtor, General Electric Credit Equities, Inc. v. Barry Thalden, a Nevada Bankruptcy Judge held that despite the fact that a creditor (GE Credit) had obtained 100% of the membership interest of a Nevada LLC (the members pledged their membership for a $3.6 million business loan, then defaulted), that the creditor was to remain ONLY an assignee of the economic and membership rights in the LLC and DID NOT obtain managerial and voting rights in the LLC because the ONLY method by which an assignee or transferee of a membership interest could obtain voting and management rights is pursuant to the Operating Agreement. Upon appeal, the district court affirmed the decision of the Bankruptcy Court.
The Operation Agreement of the LLC required the following in order to admit a “substituted member” with “voting rights”:
(a) the consent of the Managers approving such admission.
(b) the transferee was required to execute such instruments as the Managers may deem reasonably necessary to effectuate such admission;
(c) the transferee had to agree in writing to accept and adopt all terms and conditions of this Operating Agreement, as the non-transferring Members may reasonably determine.
The Operating Agreement of your LLC should include the important provisions listed above in order to avail the members of this extremely powerful protection, as provided in this case. Our standard Operating Agreement includes similar provisions and is included in the
annual records service.
Oct 2007 update: NRS 78.746 now provides "Charging Order Protection" for holders of Stock in Nevada Corporations.
